Diageo ends with 25% in United Spirits

OUR SPECIAL CORRESPONDENT

Mumbai, July 4: Diageo, the world’s largest liquor maker, today paid Rs 3,134.56 crore to acquire another 14.98 per cent stake in Vijay Mallya-owned United Spirits Ltd (USL), raising its total holding in the company to 25.02 per cent.

The acquisition, which was made at a price of Rs 1,440 per share, marked the completion of the share purchase agreement that Mallya had struck with Diageo last November.

On May 27, Diageo had subscribed to a preferential allotment of new shares in USL, amounting to 10 per cent of the post-issue enlarged share capital at a consideration of Rs 2,092.72 crore.

It had also come out with an open offer to acquire 26 per cent from the minority shareholders. The open offer had intended to acquire a maximum of 3.77 crore shares. However, shareholders did not bite the bait and Diageo could acquire only 58,668 shares from them.

After today’s acquisition, Diageo holds 3.63 crore shares in USL, acquired at an aggregate cost of Rs 5,235.85 crore. “This represents an 18 times multiple of USL’s EBITDA for the year ended March 31, 2013,” Diageo said in a press release today.

Mallya will continue as non-executive director and chairman of USL and Ashok Capoor will stay on as CEO.

Diageo named Ravi Rajagopal as a non-executive director. P.A. Murali will be the chief financial officer. He has been nominated as an executive director on the USL board.

Four independent directors are being inducted into the board: former Tata Sons director Arun Gandhi, former Karnataka cadre bureaucrat Sudhakar Rao, former Maharashtra director-general of police D. Sivanandan and HDFC managing director Renu Sud Karnad. There will be 10 directors on the USL board.

Under the terms of the original deal struck last November, Diageo should have ended up with a stake of 53.4 per cent for an aggregate cost of Rs 11,166.5 crore. The failure of the open offer meant that it would have to settle for just over 25 per cent for now.

Diageo is the world’s leading premium drinks business with brands such as Johnnie Walker, JŚB, Buchanan’s, Windsor and Bushmills whiskies, Smirnoff, CÓroc and Ketel One vodkas, Baileys, Captain Morgan, Jose Cuervo, Tanqueray and Guinness.

“USL’s strong market leading position combined with Diageo’s strength and capabilities opens an exciting and important new chapter for Diageo in the attractive Indian spirits marketÖ we will now begin the work to identify and capture the significant growth opportunities within this attractive market,” said Diageo’s Indian-born CEO Ivan Menezes who assumed office on July 1.

Vijay Mallya added: “USL has entered into the next stage of its journey and I look forward to remaining a part of that journey in my role as chairman of USL.”

The release said that Diageo had decided to close the share purchase agreement of November 2012 even though it had not been able to acquire all the shares that were covered by the deal. It said certain lenders to USL had not released 34.59 lakh shares (about 2.38 per cent of the equity capital) that belonged to USL Benefit Trust even though they had been repaid in full. USL and the trustees of the Benefit trust are taking steps to expedite the release of the securities.

Now that the shareholders’ agreement between USL and Diageo has come into effect, Diageo will be able to appoint its nominees to the roles of CEO, CFO and the head of internal audit. The members of Mallya’s UBHL group will be obliged to vote their shares at Diageo’s direction. This voting obligation will terminate when Diageo acquires a majority stake in USL or at the end of the fourth full accounting period Diageo, whichever comes earlier.

UBHL and Kingfisher Finvest — the Mallya entities — together hold 11.08 per cent of the enlarged share capital of USL.

Within the next five days, Diageo will come out with an open offer to acquire the outstanding 18.42 per cent of Pioneer Distilleries Ltd, a subsidiary of USL. Pioneer shareholders are being Rs 60 per share which values the company at Rs 85.7 crore. The maximum payout has been estimated at Rs 15.8 crore.

Meanwhile, Diageo Holdings Netherlands BV (DHN) has agreed to issue a conditional back-stop guarantee to Standard Chattered Bank with respect to the liabilities of Watson Ltd , a company affiliated to Mallya and a significant shareholder in United Breweries Holding Ltd (UBHL).

Stanchart expects to provide a $ 135 million advance to Watson to refinance certain existing loan facilities. DHN has the benefit of certain counter-indemnity protection as well as the security package put in place for the Stanchart facility to Watson.